1.

Which of the following statements about the reserve market is NOT correct?

A.

The reserve requirement affects the level of demand in the reserve market

B.

Interest payments on reserves and the presence of the discount window lower the volatility of the federal funds rate

C.

Interest payments on reserves result in a floor for the federal funds rate

D.

Without the discount window, the reserve market would not function normally

2.

Consider the Taylor rule, as defined in the textbook. Suppose the equilibrium real federal funds rate is 0.5%, the inflation rate is 8%, the target inflation rate is 2.5%, and the output gap is 2%. What is the federal funds target rate?

A.

12.75%

B.

12.25%

C.

0.25%

D.

0.5%

3.

Which of the following statements about the supply of reserves in the reserve market is true?

A.

The supply of reserves is unrelated to the amount of securities held by the central bank

B.

The supply of reserves is horizontal (perfectly elastic) above the discount rate, because banks would not lend reserves in the reserve market at a rate above the discount rate

C.

Only nonborrowed reserves are relevant for determining the supply of reserves in the reserve market

D.

The supply of reserves is horizontal (perfectly elastic) above the discount rate, because banks would not borrow reserves in the reserve market at a rate above the discount rate